- What is withholding tax (WT)?
A quick guide to withholding tax in New Zealand.
If you’re a freelancer or contractor in New Zealand, you need to know what withholding tax is. Withholding tax is represented by a “WT” code on your IRD form, but there’s much more to it than just the code.
Also known as “tax on schedular payments”, withholding tax applies to income earned from contract work, as opposed to salary or wages.
If you were a full employee, your employer would deduct PAYE (pay as you earn) from your salary or wages each pay cycle, and you wouldn’t have to think about it.
However, it’s a different story for freelancers and contractors. Instead of PAYE being deducted, it’s withholding tax.
- Who needs to pay withholding tax?
Under new laws (April 2017), all recruitment agencies and labour hire firms must deduct withholding tax from their contractors. This means if you’re freelancing with us – we do it for you! You’ll then be paid the net amount you’ve earned, after tax.
At the start of your employment, you’ll need to fill out an IR330C form for contractors, which will be sent to you or can be found here.
- How much is withholding tax?
The standard tax rate is 20%, but as of April 2017 contractors can now choose their own tax rate. This means that you can choose to pay more withholding tax throughout the year or per project, to avoid being faced with a tax bill at the end of the financial year.
Bear in mind that 20% is a relatively low tax rate, and if you earn more than $55,000 you will likely be issued a tax bill at the end of the year to cover the excess.
NZ tax rates are: 10.5% up to $14,000, 17.5% from $14,001 to $48,000, 30% from $48,001 to $70,000, and 33% from $70,000 onwards.
You can use the IRD tool to calculate your own tax rate here.
Note that if you do not declare your tax rate, you may be taxed up to 48% depending on your activities. Don’t forget to declare your tax code!
- Can I change my tax rate later?
Yes, you can change it later, but more than 2 changes in 12 months will require consent from your employer and fresh paperwork.
- What do I do at the end of the financial year?
Freelancers and contractors have to file a tax return at the end of the financial year. You can hire an accountant to help you with this, or figure it out yourself.
If you’ve earned more than $55,000 during the financial year and only paid the standard 20% withholding tax, you’ll likely be faced with a tax bill for the excess.
It’s important to be aware of this, so you can either change your tax rate or set money aside throughout the year to avoid any tax bill panic.
After you’ve filed your tax return with IRD, they will let you know how much tax credit or debit you have. You will also need to pay your ACC earner’s levy.
- Another thing! What is this ACC earner’s levy?
All workers in NZ pay toward the country’s accident compensation scheme, like a form of health insurance. This amount is 1.39% of your gross earnings, up to a maximum of $126,286 in a tax year. In PAYE, this amount is automatically deducted, but for contractors, it will be billed separately at the end of the tax year.
- Who is responsible for making sure withholding tax is paid?
Both the employer and contractor are responsible for making sure the correct tax rate is used, and forms completed correctly. The employer is then responsible for taxing the contractor’s schedular payments at this rate and passing it onto the IRD.
Contractors are responsible for their own student loan repayments and kiwisaver contributions.
If you have any other questions about freelancing with us, contact [email protected] today, or check out our website for the latest opportunities.